“468C. Special rules for natural disaster funds
“(a) In general—If a qualified taxpayer elects the application of this section, there shall be allowed as a deduction for any taxable year the amount of payments made by the taxpayer to a natural disaster fund during such taxable year.
“(b) Natural disaster fund—The term natural disaster fund means a fund meeting the following requirements:
“(1) Designation—The taxpayer designates—
“(A) the fund as a natural disaster fund in the manner prescribed by the Secretary, and
“(B) the line or lines of business to which the fund applies.
“(2) Segregation—The assets of the fund are segregated from other assets of the taxpayer.
“(3) Investments
“(A) The assets of the fund are maintained in one or more qualified accounts and are invested only in—
“(i) deposits with banks whose deposits are insured subject to applicable limits by the Federal Deposit Insurance Corporation, or
“(ii) in stock or other securities in which the fund would be permitted to invest if it were a capital construction fund subject to the investment limitations of paragraphs (2) and (3) of section 7518(b)(2).
“(B) All investment earnings (including gains and losses) from investments of the fund become part of the fund.
“(4) Contributions to the fund—The fund does not accept any deposits (or other amounts) other than cash payments with respect to which a deduction is allowable under subsection (a) and earnings (including gains and losses) from fund investments.
“(5) Purpose—The fund is established and maintained for the purposes of covering costs, expenses, and losses (including business interruption losses) resulting from a Federally declared natural disaster to the extent such costs are not covered by insurance.
“(6) Maximum balance—The balance of the fund does not exceed the lesser of—
“(A) the sum of—
“(i) 150 percent of the maximum deductible, and
“(ii) 100 percent of the maximum co-insurance (to the extent not taken into account in clause (i)),
“(B) the maximum loss under any insurance coverage that the taxpayer could reasonably expect to occur for the line of business in the case of a severe natural disaster.
“(7) Financial statements—The fund or the balance of the fund is recorded in the taxpayer’s financial statements in accordance with generally accepted accounting principles and not as a current asset and the footnotes to the taxpayer’s financial statements include a short description of the fund and its purposes.
“(8) Insurance—The taxpayer property insurance maintained by the qualified taxpayer applies to 75 percent or more of the property used—
“(A) in the qualified taxpayer’s line of business to which the fund relates, and
“(B) in the United States.
“(c) Qualified taxpayer—For purposes of this section, the term qualified taxpayer means any taxpayer that—
“(1) actively conducts a trade or business, and
“(2) maintains property insurance with respect to such trade or business that insures against losses in natural disasters.
“(d) Failure To meet requirements—If a fund that was a natural disaster fund ceases to meet any of the requirements of subsection (b) or a taxpayer who has a natural disaster fund ceases to meet the requirement of subsection (c), the entire balance of the fund shall be deemed distributed in a nonqualified distribution at the time the fund ceases to meet such requirements.
“(e) Taxation of fund
“(1) In general—The earnings (including gains and losses) from the investment and reinvestment of amounts held in the fund shall not be taken into account in determining the gross income of the taxpayer that owns the fund.
“(2) Not a separate taxpayer—A natural disaster fund shall not be considered a separate taxpayer for purposes of this subtitle.
“(f) Taxation of distributions from the fund
“(1) Qualified distributions—For purposes of this chapter, qualified distributions shall be treated in the same manner as proceeds from property or business interruption insurance.
“(2) Nonqualified distributions
“(A) In general—In the case of any taxable year for which there is a nonqualified distribution—
“(i) such nonqualified distributions shall be excluded from the gross income of the taxpayer, and
“(ii) the tax imposed by this chapter (determined without regard to this subsection) shall be increased by the product of the amount of such nonqualified distribution and the highest rate of tax specified in section 1 (section 11 in the case of a corporation).
“(B) Tax benefit rule; coordination with deduction for net operating losses—Rules similar to the rules of subparagraphs (B) and (C) of section 7518(g)(6) shall apply for purposes of this paragraph.
“(3) Additional tax—The tax imposed by this chapter for any taxable year on any taxpayer that a owns natural disaster fund shall be increased by the greater of—
“(A) 20 percent of the amount of any non-qualified distributions from the fund in the taxable year, and
“(B) an amount equal to interest, at the underpayment rate established under section 6621, on the nonqualified distribution from the time the amount is added to the fund to the time the amount is distributed.
“(4) Interest calculation—For purposes of calculating interest under paragraph (3)(B)—
“(A) all investment earnings (including gains or losses) in taxable year shall be treated as added to the fund on the last day of the taxable year, and
“(B) amounts distributed from the fund shall be treated as distributed on a first-in, first-out basis.
“(g) Definitions—For purposes of this section—
“(1) Federally declared natural disaster—The term Federally declared natural disaster means a natural disaster that is determined by Presidential declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act to warrant individual or individual and public assistance under such Act.
“(2) Nonqualified distribution—The term nonqualified distribution means a distribution from a natural disaster fund other than a qualified distribution.
“(3) Qualified account—The term qualified account means an account with a bank (as defined in section 581) or a brokerage account but only if the investments of such accounts are limited to those permitted by subsection (b)(3) and no investments are made in a related person (as defined in section 465(b)(3)(C)) to the taxpayer.
“(4) Qualified distribution
“(A) In general—The term qualified distribution means with respect to natural disaster fund an amount equal to the excess of—
“(i) costs, expenses, and losses (including losses of a type reimbursable by proceeds of business interruption insurance) incurred by the taxpayer as a result of the Federally declared natural disaster with respect to the line or lines of business for which the fund was designated, over
“(ii) the proceeds of property and business interruption insurance paid for the benefit of the taxpayer with respect to costs, expenses, and losses described in clause (i).
“(B) Limitation—A distribution from a natural disaster fund shall not be treated as a qualified distribution if such distribution is allocated to a Federally declared natural disaster occurring more than 3 years before the date of such distribution.
“(h) Special rules—For purposes of this section—
“(1) No double counting—Any portion of any deductible or coinsurance taken into account under subsection (b)(6) in determining the maximum balance for a natural disaster fund shall not be taken into account in determining the maximum balance for another natural disaster fund.
“(2) Excess balance
“(A) In general—If the balance of a natural disaster fund exceeds the maximum balance permitted by subsection (b)(6) by reason of investment earnings or a reduction in the maximum balance, the account shall not cease to be a natural disaster fund as the result of exceeding such limit if the excess is distributed within 120 days of the date that such excess first occurred.
“(B) Treatment of distributions of excess balance—In the case of any distribution of the excess balance of a natural disaster fund within 120 days of the date that such excess first occurred—
“(i) paragraphs (2) and (3) of subsection (f) shall not apply to the distribution of such excess if distributed within such period, and
“(ii) the amount of such distribution shall be included in the gross income of the taxpayer in the year such distribution was made.
“(C) Anti-abuse rule—Subparagraph (B) shall not apply in the case of any reduction in the maximum balance resulting from any action of the taxpayer the primary purpose of which was to reduce the maximum balance to enable a distribution that would not be subject to the maximum tax rate calculation or the additional tax.
“(3) Certain asset acquisitions—The transfer of a natural disaster fund (or the portion of a natural disaster fund) from one person to another person shall not constitute a nonqualified distribution if—
“(A) such transfer is part of a transaction—
“(i) to which section 381 applies,
“(ii) the transferee acquires substantially all of the assets of the transferor used in the line or lines of business for which the fund was designated,
“(iii) the transferee acquires substantially all of the assets of the transferor used in one, but not all, of the lines of business for which the fund was designated, or
“(iv) the transferee acquires substantially all of the transferor’s assets located in a geographical area and used in a line of business for which the fund was designated, and
“(B) the transferee elects to treat the acquired natural disaster fund (or portion thereof) as a natural disaster fund for the line of business for which the transferor had previously designated the fund and as a continuation of the fund (or pro rata portion thereof) for purposes of determining the additional tax imposed by subsection (f)(4).
“(i) Regulations—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provisions of this section.”